Business Forecast

The Business Forecast Module reproduces that which is implied in an earnings based valuation, namely:
  • Either constant growth to perpetuity, or growth based on the logarithmic sales trend
  • Constant Debt: NTA ratio;
  • Constant ratio of Fixed Assets to Equity;
  • Depreciation as a proxy for CAPEX;
  • Maintenance of all key ratios including GPM.

Using the calculated ratios and other key data, ValModel generates a 10 year forecast which includes:

  • A current year reconciliation to the selected FME;
  • Forecast Trading and Profit & Loss Account;
  • Detailed forecast expenses;
  • Calculation of compounding growth in forecast NOPAT;
  • Forecast Balance Sheet;
  • Forecast Cash Flow (excluding GST);
  • Calculation of ROI and Projected Value for 10 years.

In the process, ValModel calculates the following:

  • change in net borrowing to maintain the required Debt: NTA ratio;
  • quantum of CAPEX to maintain a consistent ratio of Fixed Assets to Equity;
  • amount available for dividend payments to equity holders (this represents the FCF to equity holders).
The Business Forecast module can also be used stand alone to provide detailed forecasting for business plans and to support finance applications.
The automatically generated 10 year projections form the basis for the DCF based valuation.

While the projections are generated automatically, clearly there is an ability to modify all aspects to recognise changing circumstances and abnormal CAPEX and borrowings which change the Debt:Equity ratio. However, this should not be attempted until the DCF has achieved integrity with the valuations based on Capitalisation of FME.

Once this has been reconciled, the valuer is free to change (test in fact) any of the forecast parameters to take account of factors not recognised in the earnings based valuations. For example you may introduce a declining GPM or provide for the effect of increased competition not adequately factored into the multiplier. Such changes will transfer seamlessly into the DCF and provide a basis for re-assessing the multiples and discount rates implied in the earnings based approach or enable you to discard the earnings based approaches in favour of the more reliable and robust DCF based valuation.